costs of retail payments and payment habits of the public sector dr. anikó turján 1 april 2011

Costs of retail payments and payment habits of the public sector

Dr. Anikó Turján

1 April 2011.

2

Starting points• Implementing

payments involves costs

• Network market• Market mechanisms

alone are not enough to achieve the maximal social benefits

• Costs studies by a number of NCBs

• Excessive use of cash in Hungary

• Market share of the public sector in the „retail” payments is about 30%

STARTING POINTS AND OBJECTIVES

Objectives of MNB• Estimating the number of

„retail” payments and their costs

• Overhauling payment habits of the public sector and identifying the most in-effective areas

• Investigating the options for the increase in efficiency

• Outlining the ways for achieving greater efficiency

Costs - dr. Anikó Turján

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SCOPE OF THE TWO PROJECTS


Costs of payments (CoP) Payment habits of public sector (PHP)

Whole economy (basically legal

economy)

Incoming and outgoing payments

related to public sector

Costs, revenues, fees Motivations

Reporting periodNumber of payment instruments 6+4 7

therof debit card transactionsthereof credit card transactions

thereof paper based

electronic

Business to business (B2B) direct debits

Core (business to consumer, B2C)

direct debits

Postal outpayment money order for

social benefits and other purposes

joint aspect

Payment card transactions

Direct debts

Legend: code of colour

Covered payment instruments

Coverage

Ideas for policy measures

2009

Number and values of domestic retail payment transactions

Potential cost savings stemming from changes in the use of payment

instruments

Cash transactions

Postal inpayment money orderPostal outpayment money order for pension

Credit transfers

Domestic (Ft) retail payment transactions

4

DATACOLLECTIONin CoP


Hungarian Post: 1/100%

MNB: 1/100%

Households:921/ : 0,024%300/: 0,008%

Creditinstitutions:9-12/ : 61-97%

Public sector

ALTOGETHER: PAYMENT SERVIECE PROVIDERS

ACH1/100%

Companies : 334/ : 0,31%15/ : 0,84%

Questionnaire-self-filling in

- Activity based costing, direct indirect costs, allocation keys, paid fees, revenues

- Elasticity of changes in total costs and costs for activities forestimating the fix and variable costs

- Turnover data

- Institutional information

Cash-in-transit companies:3/ : 100%

Diary for 2 weeks - self-filling in + 2 questionnaires via interview- Time consumptions- Number and values of transactions- Social and demographic data

Questionnaire - self-filling in and interview- Labour input- Paid fees- Number and values of transactions- Institutional information

- Importing cost data from survey of companies - Importing turnover data from project related to payment habits of public sector

DATA COLLECTION IN PHP

Costs - dr. Anikó Turján 5

CR(105)90%

Dec. financial funds

Social security system

Central government

Local governments

CR(26)85%*

* Based on data supplied by credit institutions

- Number and values of transactions,

- Motivations

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DEFINITIONS

1. PRIVATE COSTS• Total used resources, including the fees paid within

the payment chain

2. SOCIAL COSTS• Total used resources, excluding the fees paid within

the payment chain • the costs of MNB, PSP-s, CiT-s, households,

companies and public sector(excluding the fees paid within the payment chain)

3. PAID AND RECEIVED FEES • within the payment chain • e.g. CiT, banking, interchange, merchant fees, etc.

4. NET PRIVATE COSTS: RETURN ON COSTS • Private costs less received fees.


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OVERALL RETAIL PAYMENTS IN HUNGARY IN 2009


Volume Value (in millions)(in Ft billions) volume value

1. Cash transactions 2 834,82 51 454,18 76,08% 12,20%

2. Debit card transactions 150,25 1 050,35 4,03% 0,25%

3. Credit card transactions 24,57 200,42 0,66% 0,05%

4. Credit transfers, thereof 277,23 362 772,29 7,44% 86,02%

paper based credit transfers 47,13 61 671,29 1,26% 14,62%

electronic credit transfers 230,10 301 101,00 6,18% 71,40%

5. Business to business (B2B) direct debits 0,86 507,43 0,02% 0,12%

6. Core (bussines to consumer, B2C) direct

debits

77,00 639,97 2,07% 0,15%

7. Postal inpayment money orders 271,48 2 990,43 7,29% 0,71%

8. Postal outpayment money orders for

pension

22,00 1 541,93 0,59% 0,37%

9. Postal outpayment money orders for

social benefits and other purposes

15,98 440,80 0,43% 0,10%

10. Prepaid (food and recreation) vouchers 52,08 118,35 1,40% 0,03%

3 726,26 421 716,15 100,00% 100,00%

involving cash paper based

Legend: code of colours

Share based on (%)

Total

Payment instruments

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• Cash related payments 17 % of GDP

• Each third payment involved the use of cash

RETAIL PAYMENTS IN CASE OF PULIC SECTOR


Incoming payments

Outgoing payments

Total

Number (in millions) 45 55 100Value (in Ft billions) 1000 3400 4400

Retail payments involving cash in case of public sector

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CASH: SOCIAL COSTS AND FLOW OF FEES IN THE PAYMENT CHAIN (TOTAL IN FT BILLIONS)


MNB7,16

0,20

Households19,97

0,01

Payment service providers (PSP): 66,86

9,79 Cash -in-transit companies (CiTs):

16,01

17,42

Public sector1,42

0,52

4,96

41,79

Companies 97,39

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CURRENT SOCIAL COSTS


Volume Value Social costs

(in millions)

transaction 100 Ft value of transaction

1. Cash transactions 2 835 51 454 208,82 74 0,412. Debit card transactions 150 1 050 30,22 201 2,883. Credit card transactions 25 200 19,56 796 9,76

4. Credit transfers, thereof 277 362 772 75,08 271 0,02

paper based credit transfers 47 61 671 35,01 743 0,06

electronic credit transfers 230 301 101 40,07 174 0,015. Business to business (B2B) direct

debits1 507 0,79 919 0,16

6. Core (bussines to consumer, B2C) direct debits

77 640 7,73 100 1,21

7. Postal inpayment money orders 271 2 990 38,96 144 1,308. Postal outpayment money

orders for pension22 1 542 6,65 302 0,43

3 658 421 157 387,81 106,01 0,09Social costs in % to GDP 1,49%

Payment instruments Unit social costs per (Ft)

(in Ft billions)

Total

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TYPES OF COSTS


Type of costs Cash transactions

Debit card transactions

Electronic credit transfers

Core (B2C) direct debits

Postal inpayment money orders

Paper based credit transfers

Postal outpayment money orders for pension

Credit card transactions

Total

1. Fix 33,5% 62,3% 52,5% 63,2% 17,0% 8,6% 23,0% 73,9% 32,9%2. Variable: linear to value

8,8% 0,4% 1,5% 12,6% 4,2% 0,4% 0,0% 0,1% 9,0%

3. Variable: degressive to value

8,8% 2,0% 0,0% 0,0% 0,4% 0,0% 1,0% 2,0% 10,0%

4. Variable: linear to number

19,5% 5,0% 0,0% 0,0% 62,3% 83,7% 41,9% 5,9% 23,3%

5. Variable: degressive to number

29,4% 30,4% 46,0% 24,2% 16,1% 7,4% 34,2% 18,1% 24,7%

6. Fix and degressive elements together

71,7% 94,6% 98,5% 87,4% 33,5% 15,9% 58,1% 94,0% 67,6%

7. Total social costs (Ft billion)

209 30 40 8 39 35 7 20 387

HIGH (Relatively)

LOW

Legend: code of colours in terms of the share of fix and degressive cost elements

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HYPOTHETICAL SOCIAL COSTS


Volume Value Social costs(in

millions)transaction 100 Ft value

of transaction

1. Cash transactions 1 885 15 322 166 88 1,08

2. Debit card transactions 1 000 11 050 46 46 0,41

3. Credit card transactions 25 200 20 796 9,76

4. Credit transfers, thereof 530 391 946 43 80 0,01

paper based credit transfers 0 0 0 n.a. n.a.

electronic credit transfers 530 391 946 43 80 0

5. Business to business (B2B) direct

debits

1 507 1 919 0,16

6. Core (bussines to consumer, B2C)

direct debits

217 2 130 10 48 0,49

7. Postal inpayment money orders 0 0 0 n.a. n.a.

8. Postal outpayment money orders

for pension

0 0 0 n.a. n.a.

3 658 421 156 285 78 0,071,09%

Legend: code of colours in terms of the changes in the number of transactions

DECREASED INCRESASED UNCHANGED

Social costs in % to GDP

Payment instruments Unit social costs per (Ft)(in Ft billions)

Total

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SAVINGS IN THE CONTEXT OF CoP


In the current situation

In hypothetical situation

Absolute saving*

Relative saving* %

Social costs (Ft billion) 388 285 -103 -27%Social costs in % to GDP 1,49% 1,09% -0,40%n.a.Unit costs per

Cash transactions 74 88 14 19%Debit card transactions 201 46 -155 -77%Electronic credit transfers 174 80 -94 -54%Core (B2C) direct debits 100 48 -53 -53%

Total payment transactions

106 78 -28 -27%

Note

* - sign: decrease in costs w/ o sign: increase in costs

SAVINGS IN THE CONTEXT OF PHP

Note:• in case of full electronisation

• non-payment related aspects/factors should be also considered

Actual size of saving depends on a.m. factors

Állami fizetési szokások - Lajos Brigitta 14

Cash withdrawals from/ cash deposits to

payment accounts 6 million

Postal payments 60 million

Payments from/to own cashier‘s office 34

million

Annual saving at the

level of society 21 Ft billion

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COMBINED SAVINGS

After excluding the overlaps

the potential annual saving:

about 107 Ft billion (0,41% of GDP)


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RETURN ON COSTS, I.E. NET PRIVATE COSTS IN CASE OF CASH TRANSACTIONS AND POSTAL

INPAYMENT MONEY ORDERS W/O SEIGNIORAGE (FT BILLIONS)


Cash transactions

Debit card transactions

Credit transfers total

Paper based credit transfers

Electronic credit transfers

B2B direct debits

Core (B2C) direct debits

Postal inpayment money orders

Total

MNB 6,95 0,00 0,00 0,00 0,00 0,00 0,40 7,36Cash-in-transit companies

1,28 -1,05 0,23

Payment service providers* +**

17,12 -3,81 -17,50 1,29 -18,79 -0,47 1,38 -6,95 -10,23

Companies*+** 144,14 17,76 67,58 13,89 53,70 1,26 4,66 34,32 269,73

Households* 37,39 16,27 25,00 19,84 5,17 1,69 8,58 88,93

Government** 1,94 3,65 5,59Total 208,82 30,22 75,08 35,01 40,07 0,79 7,73 38,96 361,60Note: * Total value excludes the net private costs related to credit cards transactions. ** The net private of costs of the companies and the government are separated only in case of cash transactions and postal inpayment money

orders. In case of the remaining payment instruments the net private costs of the goverment are included in the net private costs of the

companies.

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INTERNATIONAL EXPERIENCES

• Cautious, sporadic measures, no clear trend or best practice• Fight on cheques

Cost/transaction-based pricing (Norway) Plans (Ireland, Malta, UK)

• Payment cards Regulation on interchanges fees (Spain, Australia, US) Subsidy, VAT reduction (the Netherlands, Argentina, South-Korea) Surcharges allowed (the Netherlands) or forbidden/limited (Sweden)

• Administrative intervention against cash above a value limit and related to fight on money laundering

(Belgium, Italy, the Netherlands, Bulgaria)

• More ambitious and stronger regulation affecting retail payments from/to the public sector Payroll payment for Govt. officials exclusively in scriptural money

(Belgium, Latvia, Denmark) Tax payments exclusively in scriptural money (Belgium, Greece) Paying pensions almost exclusively in scriptural money (Lithuania)


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SOME IDEAS FOR HUNGARIAN POLICY MEASURES AT VARIOUS TIME HORIZONS• to create an incentive system for encouraging the use of non-

cash payment instruments from/to public sector, and thus prompting changes in payment habits

• to establish a joint fund for setting up POS terminals at SME retailers (in the undersupplied sectors and regions)

• to introduce Govt control above the size of interchange fees• to further electronise the voucher market (via incentive system)

and to implement the turnover at the POS terminals• to charge the payer for the use of postal inpayment money order

or at least to make its costs transparent for the payer • to establish an overall EBPP open to all users and service

providers• to further improve the access to payment services in the

countryside: full electronisation of the postal payment services• to make unambiguous to all that cash payments may be rejected

• to improve the overall infrastructure • to centralise the liquidity management in the entire Govt. sector


The primary objective of the MNB shall be to achieve and maintain price stability.

CONCLUSIONS

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• Strong cross-subsidisation between payment instruments at payment service providers

• Annual potential savings: Ft billion 107 (0,41% of GDP)

• Modernisation is worthwhile• Actual savings depends on the changes in

the use of payment instruments• Enough input to launch war on cash• Social dialogue: underway

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THE IMPORTANCE OF DIALOGUE

With public sentiment, nothing can fail;without it nothing can succeed.

(Abraham Lincoln)


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Costs of payments • Anikó Turján• Éva Divéki• Éva Keszy-Harmath• Gergely Kóczán• Kristóf Takács

AUTHORS

Payment habits of public sector

• Éva Divéki• Brigitta Lajos• Miklós Luspay


costs of retail payments and payment habits of the public sector dr. anikó turján 1 april 2011

Documents

costs private costs

types of costs costs

current social costs

costs of mnb

php costs

gdp costs

anik turjn slide

projects costs